On Oct 4, 2013, we downgraded Parker-Hannifin (PH - Analyst Report) to Underperform based on the company’s dismal fourth quarter results.
Why the Downgrade?
Estimates for Parker, which focuses on the manufacturing of motion and control technologies, have been declining ever since it reported fourth quarter results on Aug 7. Parker-Hannifin’s fourth quarter revenues as well as earnings per share of $3.43 billion and $1.78 missed the Zacks Consensus Estimate of $3.46 billion and $1.95, respectively. The company also disappointed with its outlook for fiscal 2014.
Following the release of fourth quarter results, the Zacks Consensus Estimate for 2014 has gone down 13% to $6.41 per share. The Zacks Consensus Estimate for 2015 also declined 2.8% to $8.04 per share. With the Zacks Consensus Estimate for both 2014 and 2015 going down, the company now has a Zacks #5 Rank (Strong Sell).
Cause for Concern
Parker was primarily affected by major cancellations and rescheduling of orders in the third quarter. Further, the company has been witnessing continued decline in industrial North America sales. The decline was attributable to recessionary conditions, negative currency translations and flat organic sales. In addition, orders also declined for the segment.
The company expects the sluggish trends to continue at least through the first half of fiscal 2014. Given the fourth quarter performance and the challenging outlook, we fail to see any significant catalyst that could drive the shares in the near term. Margins will also remain under pressure.
The Zacks Consensus Estimate for the first quarter of 2014 has gone down 16.6% to $1.46.
While we prefer to avoid Parker-Hannifin until we see signs of improvement in the company's performance, other stocks operating in the industry that are worth a look include Momenta Pharmaceuticals Inc. (MNTA - Snapshot Report), Middleby Corp. (MIDD - Analyst Report) and The Babcock & Wilcox Company (BWC - Snapshot Report). Momenta Pharmaceuticals and Middleby Corp carry a Zacks Rank #1 (Strong Buy), while Babcock & Wilcox Company has a Zacks Rank #2 (Buy).